Only a 0.5% Rate Cut Will Help Aussie Consumers: Pro

The Reserve Bank of Australia is widely expected to cut interest rates by 25 basis points when it meets on Tuesday, after data showed last week that inflation slowed sharply in the first quarter. However, one analyst tells CNBC that to have any material impact on the economy, the central bank needs to cut rates by 50 basis points.

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"If they [RBA] really want to be effective, I think they should do 50 [basis points] in one go, that way if the banks pass on even 40 of that, that really helps the consumer out," Kumar Palghat, Managing Director at asset management firm Kapstream Capital told CNBC on Monday.

Palghat argues that a 25 basis points cut will only push the banks to cut 15 basis points off their rates "which really doesn't put a lot of money into the pockets of consumers who are already struggling with their mortgage rates."

Since the RBA's last interest rate cutin December 2011, some local banks have raised rates by seven to eight basis points, according to Palghat. For example, in April, ANZ raised its mortgage rate by 0.06 percent to 7.42 percent.

The RBA had said at its last review meeting on April 3, when it held the cash rate at 4.25 percent, that it would consider cutting rates on May 1, if inflation stayed tame, to boost weak growth in non-mining sectors like retail and manufacturing.

While Palghat thinks a 0.5 percent cut in the cash rate is the need of the hour, other analysts tell CNBC that that would be too extreme.

Matthew Circosta, Economist at Moody's Analytics, says a 25 basis point cut is more likely as the central bank keeps an eye on other key economic indicators like GDP figures and unemployment rates. Australia's first quarter GDP data are due on June 6.

He adds that any big cut by the RBA, which hasn't happened since the global financial crisis in 2008, could confuse markets with regard to what message the central bank was giving out.

"If we see a 50 or 75 basis point cut, then do we really think growth is heading sharply lower and we need monetary stimulation?" Circosta said.

"At this stage I think 25 is prudent and they'll keep watching the data flow and if things take a turn for the worst then they will continue to cut," he said.